What Can Brown Do for Bank Rates?

When Republican Scott Brown won the special election to fill the Senate seat long held by Edward Kennedy, the initial focus was on how the shifting balance of Congressional power could slow down, dilute, or even doom health care reform. With banking reform another hot topic in Washington, it is also worth considering what this change would mean to President Obama's recent proposals on that subject.

The President has proposed three changes concerning banks: 1) to levy a special tax on the largest banks to recoup some of the money spent on the banking bailout; 2) to restrict banks from endangering deposits with proprietary trading; 3) to limit the size any one bank could achieve.

From a depositor's view point, the first of these proposals could suppress bank rates as banks seek to pass the cost of the tax along to depositors. The second proposal could be good for depositors by making their accounts safer. Bank lobbyists would argue that proprietary trading leads to profits which can encourage banks to offer higher bank rates, but this has proven to be a bad deal for depositors in the past. When banks take excessive risk, if they win the banks keep the lion share of the profits. When they lose, depositors assets are in jeopardy. Finally, the third proposal, to limit the size of banks, doesn't really seem workable, but it would probably be more of a neutral issue for depositors anyway.

With it now more difficult for the Democrats to unilaterally push anything through the Senate, one impact of Brown's election is that these banking proposals will stand less chance of passage. On the other hand, it could push Democrats in an even more populist direction, which usually backfires economically. Stay tuned to see how this plays out!

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